Reporting considerations under Indian Accounting Standards for mutual funds

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In January 2022, the Securities and Exchange Board of India (SEBI) came out with SEBI (Mutual Funds) (Amendment) Regulations, 2022 (‘MF Regulations’), which mandated Asset Management Companies (AMCs) to prepare the financial statements of their mutual fund (MF) schemes in accordance with Indian Accounting Standards (Ind AS), with effect from April 1, 2023.

Thereafter, SEBI in a circular dated February 4, 2022, released guidelines on accounting with respect to Ind AS, wherein it also prescribed the format for presentation of financial statements. Based on the above requirements, mutual fund schemes will have to prepare the first Ind AS financial statements for the year ending March 31, 2024 along with comparatives for the year ending March 31, 2023 and the opening balance sheet as on date of transition i.e., April 1, 2022 as per the principles laid down in Ind AS 101 – First Time Adoption of Ind AS.

The requirements to prepare financial statements under Ind AS is a significant change for mutual funds. Some of the potential areas of impact of Ind AS on mutual fund schemes could be:

  • Significant change in presentation format of financial statements
  • Increased disclosures under Ind AS such as, fair value disclosures and risk management disclosures
  • Measurement changes such as, accounting for transaction costs on investments (viz. to be charged to revenue account instead of capitalisation)
  • Difference in approach for fair valuation of investments as required by MF regulations and Ind AS 113 – fair value measurement
  • Assessment of debt vs equity classification for unit capital
  • Assessment of impact on distributable surplus

As per proviso to clause 50(1A) of the MF regulations, in case of any conflict between the requirements of Ind AS and the MF regulations and guidelines issued thereunder, the mutual funds shall follow the requirements specified under the MF regulations. Relevant stakeholders will need to deliberate on the approach to be adopted on transition and the areas where MF regulations result in a carve out from the application of Ind AS principles. A clarification from the regulator may be useful in this regard.

Mutual funds need to do detailed impact assessment for transition to Ind AS, align its chart of accounts, identify and prepare the relevant disclosures, and assess any potential impact on its systems and processes. Finance teams are under constant pressure to deliver timely and high-quality financial reporting in an environment of technological change, increased regulatory change and increased scrutiny. Fund houses that have outsourced the preparation of financial statements to service providers will need to initiate the discussions for the activities required for transition to Ind AS.

Considering the large volume of financial statements that a mutual fund needs to prepare for individual mutual fund schemes, it should also aim to deploy solutions to automate the financial reporting process. Automation enables consistent and repetitive preparation of financial statements and other reports over multiple versions and reporting periods.

The date of applicability of Ind AS for adoption of financial statements is not far away, considering half yearly reporting requirements and the requirement to prepare and present comparative period financials under Ind AS. AMCs and mutual funds will need to gear up for the transition to Ind AS and make necessary changes to their existing systems and processes for preparation of financial statements and other periodic reports at the earliest.

(Co-authored by Jigar Parikh – Partner, FAAS EY India & Manan Lakhani – Director, FAAS EY India)

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